Gold erased earlier losses to hit a one-week high on Wednesday, as U.S. Treasury yields eased after subdued inflation data, with bullion gaining further support from a dip in the dollar.
"Gold is still taking cues from the Treasury market and today's data lessens worries about near-term inflation," said Edward Moya, senior market analyst at OANDA, saying that inflation pressures were currently driving yields, rather than gold, higher.
"If today's 10-year note sale has decent demand, gold prices could eventually make a run towards $1,730... The $1,700 level will provide key support...but that should hold unless the bond market selloff resumes," Moya said.
Ten-year U.S. Treasury yields slipped after data showed U.S. consumer prices increased in February, though underlying inflation remained tepid. Gold's status as an inflation hedge has been challenged by a firmer dollar and higher bond yields, which translate into a higher opportunity cost of holding non-yielding bullion. Prices fell to their lowest in nine-months on Monday, at $1,676.10.
Real rates have risen sharply over the last few weeks due to higher nominal rates, without a commensurate rise in inflation expectations, TD Securities wrote in a note.
"With massive Treasury issuance on the horizon, the pressure on higher rates should continue to weigh on precious metals in the near-term." The U.S. House of Representatives paved the way for a $1.9 trillion U.S. COVID-19 relief bill to be considered on Wednesday.
The European Central Bank is also grappling with a rise in yields, but policymakers remained divided on large-scale market intervention ahead of a policy meeting on Thursday. Silver rose 0.5% to $26.04 an ounce. Palladium was flat at $2,296.76, while platinum jumped 1.7% to $1,188.82.